Measuring the Social Return to R&D

Is there too much or too little private research and development (R&D)? A large empirical literature reports estimates of the rate of return to R&D ranging from 30% to over 100%, supporting the notion that there is too little private investment in research. However, this conclusion is challenged by the new growth theory, which emphasizes a richer description of the connection between R&D and productivity. In this paper we bridge the gap between the theoretical and empirical literatures. Using the framework of an R&D-based growth model, we derive analytically the relationship between the social rate of return to R&D and the coefficient estimates of the empirical literature. Somewhat surprisingly, we show that these estimates represent a lower bound on the true social rate of return. Furthermore, our analytic framework provides a direct mapping from the rate of return to the degree of underinvestment in research. Using a conservative estimate of the rate of return to R&D of about 30%, optimal R&D investment is at least four times larger than actual investment. JEL Classification: O32, O41 Measuring the Social Return to R&D 1